Suppose an economist finds that real interest rates are extremely high in most recession, which are the times when employment is low. This finding would pose the biggest problem for the
A) new classical theory of the business cycle.
B) real business cycle theory.
C) new Keynesian theory of the business cycle.
D) Keynesian theory of the business cycle.

Question

Quizplus · Accepted Answer

Real business cycle theory suggests that business cycles are driven by real (supply-side) shocks rather than monetary factors. High real interest rates during recessions, when employment is low, would challenge this theory, as it implies a demand-side issue rather than a supply-side one.

Suppose an Economist Finds That Real Interest Rates Are Extremely